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Feedback is ubiquitous in complex systems and critical to the process of designing public policies to solve problems such as climate adaptation. However, well‐known cognitive and institutional constraints can impact information feedback processes, limiting a system's ability to incorporate feedback into policy designs. This study analyzes the role that institutions play in regulating feedback in coupled infrastructure systems (CIS) to support the development of climate‐adaptive policies. Focusing on urban water systems, we ask:how do multilevel institutions governing information processing influence urban water systems' climate‐adaptive policy responses?Using the CIS framework, we develop a theoretical argument for policy design based on the cognitive model of active inference. Drawing on hydrological, administrative, media, interview, and institutional data, we trace two urban water systems' policy design processes over a decade. We find that successive waves of state‐level changes to water planning rules prompted more “exploratory” information processing during the study period. Moreover, an urban water utility's ownership type (public vs. investor‐owned) influenced how expected climate impacts were incorporated into policy designs. These findings provide insight into how institutional arrangements shape policy designs and suggest ways such arrangements may be altered to enable adaptive responses in the face of environmental uncertainty.